Negative Gearing?

Posted on: 24.05.2016

First, let’s cover the different types of gearing

Positive Gearing – This means that your outgoings spent on the investment property (loan interest & maintenance etc.) are less than the income generated from it. This means you’re making a profit.

Neutral Gearing –  This means that your outgoings spent on the investment property (loan interest & maintenance etc.) are equal to the income generated from the property.

Negative Gearing –  This means that your outgoings spent on the investment property (loan interest & maintenance etc.) are more than the income generated from it. This means you’re making a loss.

Negative Gearing Explanation and Example

Put simply, negative gearing is used by property investors to reduce their taxable income, whilst anticipating good capital growth in the value of the property long-term to return a profit.

For example, John has an investment property with a loan amount of $400,000 on an interest rate of 6% (John pays $24,000 in interest annually).

John receives a rental income from this property of $400 per week ($20,800 annually).

                                Outgoing interest $24,000 – Rental income $20,800 = -$3200 

This gives him a loss per year of $3,200. John uses this loss as a deduction on his taxable annual income of $63,200 to reduce it down to $60,000.

Whilst negative gearing can be useful for reducing your tax bill, it’s important to remember it’s a method that is dependent on capital growth.

A lot of savvy investors have combined the method of negative gearing with cost effective renovations and maintenance to assist with the capital growth of the investment property.

Note: It’s important to remember that it’s not just interest on the loan, but also things like maintenance, renovations/improvements etc. that can count towards your overall investment property expenses.

It’s always a good idea to do some research into which type of gearing will best suit your needs and we recommend speaking to your accountant for the best advice.

If you have any questions you can request to be contacted by Kirsty Gray at http://www.uprosper.com.au/contact/